U.S. economic growth slowed during 2011's first quarter, impacted by higher energy prices and poor weather. Such growth is likely to pick up speed in coming quarters.
The American economy grew at a 1.8 percent real (after inflation) annual rate during the January–March 2011 quarter, the weakest performance since 2010's second quarter. The meager 1.8 percent growth pace was in line with the view of forecasting economists.
Growth during 2010's final quarter was at a 3.1 percent growth pace, with real growth during 2010 at 2.9 percent, the best in five years. In contrast, the U.S. economy nose-dived at a 2.6 percent real rate in 2009.
Gas and snow
Higher gasoline costs (and soft consumer confidence) led overall consumer spending to rise at a 2.7 percent real annual rate, down from the more robust 4 percent real annual pace of the prior quarter. Consumer spending accounts for nearly 70 percent of all spending within the U.S. economy, one of the highest levels in the world.
Fierce winter storms closed businesses and delayed building projects in much of the U.S. during the first quarter. Blizzards led nonresidential construction activity to decline at a 21.7 percent annual rate during the quarter, following a modest increase in 2010's final quarter.
In addition, severe pressures on state and local government spending and a sharp decline in military outlays led total government spending to decline at the fastest rate since 1983, according to bloomberg.com. Federal government spending, when compared to the prior quarter, declined the most in 11 years.
Inflation pressures rose. The price index for personal consumption expenditures (PCE, a favorite of the Federal Reserve) rose at a 3.8 percent annual rate during the first quarter. The PCE core rate — excluding food and energy costs — rose at a 1.5 percent annual rate, in line with the Fed's presumed 1.5 percent-2 percent target range.
Most forecasters see first quarter economic weakness as an aberration, rather than the norm. Forecasting economists see growth returning to a 3 percent-3.5 percent real annual rate in coming quarters, with some forecasts even stronger. The Federal Reserve reduced its own forecast of 2011 U.S. economic growth to a 3.1 percent-3.3 percent real rate, down from the 3.4 percent-3.9 percent forecast range announced last January.
The major unknown still involves oil price volatility tied to political and military conflicts in northern Africa and the Middle East. Other major issues of Euro-zone sovereign debt anxiety and what may or may not happen in coming weeks relative to future U.S. government spending and the debt ceiling also makes forecasting more than a bit "iffy."
Always keep in mind, economists make forecasts of the future not because we know what is going to happen. We make forecasts because we are asked to … a big difference!
Federal Reserve Chairman Ben Bernanke held the Fed's first-ever press conference last week, a big deal to the media — much less of a big deal to financial markets. This news conference followed the Fed's regularly scheduled Open Market Committee (FOMC) meeting, a group that meets roughly every 45 days.
The Fed chairman did what he was supposed to do: provide a somewhat complex explanation of what the Fed has been doing in recent years without saying something that he would regret, or that bond market players would take wrong.
Bernanke indicated that the Fed would complete its second round of additional monetary stimulus, affectionately known as quantitative easing two, or "QE2." This program of purchasing $600,000,000,000 of additional U.S. Treasury securities — all done with newly created money — will conclude in June.
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